Self-storage properties recently made the #1 position on the lists that nobody wants to be on: 1) fastest declining same-store occupancy and 2) fastest declining same-store rents. But with every storm cloud there is a silver lining for those who stay on top of the trends and make their plans accordingly.
Episode 132: Bad Stats Should Yield Opportunity Transcript
The self-storage industry just received a horrible report card. Out of all of the problems in the world of commercial real estate, office buildings, retail centers, hotels, storage just ranked number one worst in two areas: Number one, fastest rate of vacancy, and number two, fastest decline in rents. That is not the report card anyone wanted. But if you sift through the carnage of what's going on in the self-storage industry, you can start to see the opportunity. This is Frank Rolfe, the Self-Storage University podcast. We're going to talk about what happened to self-storage and then where the opportunities might be going forward. We all know there's too much self-storage in America today. You see it everywhere: massive, massive overbuilding. How did it happen? Well, people in America go through periods where they get frothy with optimism and they tend to overbuild. And it's true of all sectors. That's what's happened to hotels and malls and office buildings. But self-storage is kind of unique because it's so easy to build. Whereas to build that giant office tower might take a decade of engineering and planning through the city council and very difficult to assemble the debt for it in the equity.
Storage facilities are very simple. They're not complicated to build. They don't require a whole lot of engineering know-how. And cities are very flexible in placing them almost anywhere. So when people decided, hey, storage looks like a good thing, they just went crazy with it. Often on many interstate highways, you will see storage next to storage next to storage, each with a bigger banner: Rent here, I'll give you two months free. The next one is I'll give you three months free. That is not good. And that is a typical end product of overbuilding, which is exactly what self-storage did. But on top of that, and I've been discussing it now for years, nobody wants multi-story self-storage. This is something that was created in the minds of large storage operators. But people like to just pull up their car and unload their items directly into their unit, the classic original public storage orange roll-up door format. This crazy concept of multi-story climate control where you have to get a dolly, put your stuff on the dolly, transport it 20 minutes up to your unit, that just is not what the consumer wants.
That's what the owner wanted. That way they could take storage and make it multi-story so they could afford to pay more for the land and for the building. And clearly Americans are responding to a product they didn't really want by naturally not renting it. The bottom line is storage is in a real mess right now. If they don't pull out of it, I don't know what will happen to it because I don't know how it's possible you could do worse in occupancy and rents than office, hotel, and shopping malls. We all go to malls on a regular basis. We see all the massive vacancy. We see they can't find anyone to rent the space. We see pop-up stores by goofball people, things where they'll put in just a bunch of T-shirts and pretend it's a department store. But yet storage eclipses all of them right now with a bad report card. So then where is the opportunity in self-storage? Well, the first answer would be, well, it's not where everyone else is doing it. Urban markets used to be the king of storage. Everyone said, oh, you want to be in areas with super high density of people.
But the problem is urban areas are not only overbuilt, but people are fleeing urban cores thinking they're too dangerous, they have bad schools, they want to get the heck out of there. Where are they going? They're going into the suburbs and the exurbs. And if you go into the suburbs and exurbs, and particularly the exurbs, you'll see those storages are showing higher occupancy and higher rents. Why? Because the megatrend is people are going that way, and with the general movement of the population comes upward pressure on demand, because storage is just about supply and demand. So get away from the pack. Don't do what you see public storage and other large operators doing because that's not where people want to go. That's where they wanted to go because at one time that's where they thought the future was, but they guessed wrong. America has changed dramatically since COVID. People want their own more privacy, lower density, larger yard, safer area, and that's not to be found in the city. That's to be found if you drive farther out. That's basically the future if you want to buy a storage facility where you have rising rents and rising occupancy. You've got to get out of town.
Those big operators are screwed. They can't move their things. They're stuck with the stupid multi-story things that nobody wants anymore. But get out of town. You're not stuck, hopefully. You can push farther out. The other item is simple. I already mentioned it. People want the old original single-story unit with the roll-up door that they can back their car pickup to and move their things directly into the unit. I have three storage units in my small town in Missouri, and guess what? They're all three exactly what I'm describing: the single story, roll-up door, pull your car up, and guess what? In all three facilities that I'm in, they're completely sold out. There's no occupancy available at all. And yes, the rates are definitely going up because that's what the consumer not only wants today, but that's what they have always wanted. The bottom line is if you don't want to be in with the pack of declining occupancy and declining rents, then don't do what the pack is doing. Get out of those urban centers and provide that single story product that everybody always wanted. Now the other thing to consider in self-storage is that with every cycle, when an industry hits the skids, which storage appears to be heading for, then the winners in that are those who then buy it for a lower price, sometimes less than construction cost, definitely lower than what the former owner had in it.
That moment is rapidly approaching. So there will be a time someday when even those multi-story facilities start to gain traction, start to be building back, but they'll have to get there with much lower rents. The only way with supply and demand you can attract customers is when your price is attractive to them. And clearly when you have declining occupancy, it's not. But hang in there because at some point in the movie, opportunity may return to those urban areas when storage facilities hit bottom. Look at office buildings. They've already run that course, run that cycle. A lot of office buildings are simply being converted into apartments. The shell still works. Apparently there's still demand for a high-rise shell, but what's on the inside, office units no longer in favor, but apartments are in demand. Like any industry, you just have to be nimble. You have to be observant of what's working and what's not working. There's always opportunity. There's always a silver lining to every cloud. You just have to know where to look. This is Frank Rolfe, the Self-Storage University podcast. Hope you enjoyed this. Talk to you again soon.